Posted
by
Soulskillon Monday August 01, 2011 @03:12PM
from the math-nerds-win-again dept.

wiredog sends in a story about how knowledge of lottery rules and statistics has allowed opportunistic players in Massachusetts to spend hundreds of thousands of dollars on tickets while being assured of a massive payoff. Quoting:
"Because of a quirk in the rules, when the jackpot reaches roughly $2 million and no one wins, payoffs for smaller prizes swell dramatically, which statisticians say practically assures a profit to anyone who buys at least $100,000 worth of tickets. During these brief periods — 'rolldown weeks' in gambling parlance — a tiny group of savvy bettors, among them highly trained computer scientists from MIT and Northeastern University, virtually take over the game. ... Srivastava calculated that a gambler who bought 200,000 Cash WinFall tickets during four rolldown weeks in a year would win enough to cover the $1.6 million investment and earn a profit of $240,000 to $1.4 million — without ever winning the jackpot."

My understanding is that this is the system working as intended. They don't want the jackpot to continually grow unchecked so when it reacher a certain size they pay out more on the smaller wins. My mother told me a similar story about older electronic slot machines. Basically the natural probability of winning was too low so they had to write a forced payout routine to make sure that the machines payed out the percentage of the time the casino's wanted (remember casinos want you to win often enough

Only for those who are bad at math if you ignore the fact that $100,000,000 is worth much more than 100,000,000 times $1; at least to people's mind's. That is, $1 has very nearly zero utility, while anything above a certain amount (say $10,000,000) has nearly infinite utility. Even a poor person isn't going to significantly miss $3 per week, but a large multimillion dollar payoff properly managed will leave a person set for life (or buy whatever a person could want for a limited amount of time). And it m

A jump in income of 100,000 to 200,000 is worth much less in terms of quality of life than from 10,000 to 20,000.

Were it not for punitive income tax, an extra $100k a year on my salary would allow me to comfortably retire after a decade; an extra $10k certainly wouldn't. I don't believe lottery winnings are taxed, so a $1 million win would be enough for me to never have to work at anything I didn't want to do for the rest of my life.

In California, not only are your winnings taxed, they may also be reduced for State taxes owed, child support unpaid or an entire range of items (Student loans, DMV fees, etc) that you may owe to the State.

Actually if you put the money in a 5% vehicle then lump sum vs 30 year payoff usually works in your favor, not to mention that some lotteries aren't assumable by your heirs which means they get screwed if you die before the end of the payoff period. Regardless of the hypotheticals your best bet if you win the big one is to contact an attorney and a certified financial planner who can do all that analysis and protection work for you.

Living without rent or a mortgage to worry about would give a vast amount of flexibility. Spending $300k-500k of that million on a nice house would still leave you with a very comfortable amount to live on, and outgoings that basically only need to cover food and fuel - it might not keep you in Ferraris and hookers for long, but for someone whose wishes simply stretch to a secure, relaxed life, an extra million would be plenty.

A high school grad can only expect [about.com] to earn $1.2million in their lifetime, and eve

I interpreted "to never have to work at anything I didn't want to do" as meaning not on top of current salary. My calculation is on the basis that while Vimes' law is in your favour - buy a house without having to pay loads for cumulative interest - and you can probably get a reasonable interest rate, it's unlikely to be more than about 1% above inflation. which means that your $500k left over after the house is giving you $5k a year for food, fuel, maintaining car and house, holidays. If you're within a de

I read that line more as "if I don't want to do it, I can tell the boss to suck it without worrying about where the next month's rent will come from"; in either case, I see where you're coming from, and I'm sure I'll get more blasé about money once I leave the "impoverished student" stage of my life and become a decently paid member of the evil corporate empire, I was just surprised at how dismissive people are of a lump sum almost the size of what a lot of people can expect to make in a lifetime.

In the short term however, going from $100,000 per year to $200,000 will typically mean that you can get a house with a pool instead of without, can get the nice 26-foot boat that you wanted instead of the 19-footer, and that you can drive a Jaguar instead of a really nice Honda.

Going from $10k to $20k typically means that you're no longer living on the street boiling ramen noodles over a fire-barrel.

Or as Chris Rock put it (paraphrased): "Poor people should get prenups, not rich people. Think about it: if

You need to move somewhere cheaper...unfortunately your income might suffer as well.

I make $80K and my wife makes about $30K (part time work for a non-profit that she loves), we live in a nice house with great neighbors who aren't too close. Have an in-ground pool and both drive nice cars. We are cheap people, we hardly ever eat out but I love to cook. We never go to the movies, but get a hell of a lot of DVDs through Netflix.

Your household is in the top 1.5% of income earners in the USA. Way, way, past "middle class". Given the very low cost of living in the US, you should be in a _very_ comfortable lifestyle, especially if you've been earning like that for more than a couple of years.

If you were both living off your wife's wage - still nearly twice the median - you'd probably just be on the upper end of "middle class".

Even if they weren't, how would you live the rest of your life on $1,000,000? Even never touching the principal, you might turn $35-40k a year from a tax-free bond fund, assuming you get a decent return. Assuming you suck it up hard and keep working for the next 5 years and plow that back into the principal, you're still praying for good years to get you to $50k.

If your house is paid for, you have no health issues and your property taxes are zero you might be able to sit i

Depends what your aspirations are - as soon as the mortgage is paid off, you can stop worrying about money, which would be a reasonable milestone for a lot of people. It might not be "never work again" territory, but a couple of hundred thousand to buy a decent place to live suddenly saves you a huge amount in long-term interest, allows a lot more of your monthly salary to go into savings, and basically buys you the freedom to do things like packing in your job and backpacking around Asia for a few months w

Even if they weren't, how would you live the rest of your life on $1,000,000?

Well now, I'm not greedy for a massive house in the suburbs with a pool and a ferrari, so would buy a reasonable place to live for myself, plus a few small apartments that I would rent out and live off the income

There's no tax on lottery winnings in the UK, a country which is very similar to the US in many ways. I know the article is specifically about Massachusetts, but being so rude about what was, in fact, a quite reasonable assumption just makes you look like an asshat.

Agreed. Americans (me being one of them) have a social understanding that literally nothing you ever do from money is tax free. (IMO, it's actually this stigma interacting with our innate desire for individualism that has led some to the extremism of the Tea Party.)

A curious thing to consider, since the US is routinely cited as having some of the lowest effective taxes in the developed world, but one of the most complex tax codes (which is in part because of our social understanding that all monetary exc

A curious thing to consider, since the US is routinely cited as having some of the lowest effective taxes in the developed world,

Except for our corporate tax, which is among the highest in the world, and the fact that we tax earnings abroad (and most countries do not).

Our tax rates are lower than Europe's because our welfare state, while pretty heavily entrenched, is not as heavily entrenched as theirs. I think Russia might have a lower effective tax rate than we do on general income (and a flat tax? Can't remember).

There is no "except". Do you understand what an effective tax rate is? It doesn't matter what parts or more or less... in fact that was the ENTIRE point of what I was saying: Americans, (your post being a prime example), are FAR too concerned with making sure that EVERY exchange of money is taxed, but we are accomplishing LESS through our taxation.

In addition, what we spend the money on is COMPLETELY irrelevant to discussing complexity of the tax code, or effective tax rates. I don't care if you us it to

Granted everything you buy is taxed, everything you might ever want to do with the money is taxed, and when you die, the state will take a chunk of it as tax. But no, the winnings themselves are not taxed.

I agree, and will often spend a buck or two on lottery tickets for that reason. The problem is that people who are poor will often spend more than they can afford on lottery tickets in the mistaken belief that they are significantly effecting their odds of winning. Spending $50 or $100 a week on lottery tickets costs money that could be spent on other things, and doesn't really have any noticeable affect on your odds of winning. Even spending $100,000 on tickets doesn't have a statistically significant e

Spending $50 or $100 a week on lottery tickets costs money that could be spent on other things, and doesn't really have any noticeable affect on your odds of winning.

Are you trying to say that buying 100 $l lottery tickets has no better odds of winning than buying one? I think you are wrong. The math says so, too.

To make it easy, let's say each ticket has a 1/10 chance of winning. One ticket, your odds are 1:10. Two tickets, your chance of "not losing" (.9 times.9) are 81%, so winning is now not quite 2:10. Three tickets, 1-0.9^3, four tickets 1-0.9^4, etc. This number asymptotically approaches one. That's for one winner out of N.

I am aware of how statistics work. It has an effect, just not a statistically notable effect. Certainly odds of 1 out of 7809327498375098375987342509837098 are worse than odds of 50 out of 7809327498375098375987342509837098, but both events are so unlikely as to be impossible. If you're a person who has barely enough money for food every week, you're statistically not much worse off spending a buck a week on lottery tickets than spending $50, and the other $49 can go to other things.

Actually no math is necessary - all people need to know is that during "rolldown week," the expected return of playing the game is positive. This is just as true for people who spend $3 as for people who spend $300,000. So I think it is debatable whether this is "broken" at all. It's probably not something a private company would do; then again they might have loss leaders sometimes.

during "rolldown week," the expected return of playing the game is positive. This is just as true for people who spend $3 as for people who spend $300,000.

The article said otherwise:

Mark Kon, a professor of math and statistics at Boston University, calculated that a bettor buying even $10,000 worth of tickets would run a significant risk of losing more than they won during the July rolldown week. But someone who invested $100,000 in Cash WinFall tickets had a 72 percent chance of winning

Only if you're rich. If you're poor, the small chance of winning * the utility of getting rich is far greater than the great chance of losing * the small utility of the price of a lottery ticket, thus making the total utility greater than zero.

The utility (value) of money is an s-curve that asymptomatically but monotonically nears a fixed value in both extreme debt and extreme wealth.

Statistics is a tool. The statistics are being used by the state to make sure that neither the lottery jackpot nor the money being taken in grow to a huge number. In that use, the statistics are perfectly sound. Raise the payouts on lower level winners, you pay out more money.

Since the payouts go up, the system benefits low volume players too. A winner is a winner -- and during down weeks pays Joe Plumber just as much as Martha Deeppockets.

You seem to be missing an important part. Make sure they all are different! I'm afraid you wouldn't be making much if you buy them all the same! (and by today standards, I'm positive someone could just do that);)

Guys, you were all laughing when I bought the lottery tickets from Dogbert 50% off. He assured me that the odds of winning are just one one millionth less, but the price was 50%, count them full fifty percent off. You guys were taunting me for buying the previous day's tickets. Ha! Who is laughing now?

I see now. So as long as people have bad ideas about statistics it is ok. Believing some numbers are lucky is ok. Ignorant people saying things like "I haven't won and I've been playing for years, I have to win soon" is ok. Having people believe that God told them to buy a lottery ticket is ok. But when one someone actually has a chance to be correct about having a chance to win and make a profit then it isn't ok. Why don't the governments stop pretending. The lottery is intended on a tax for those who can't do math. And most of those people can't do math because the government schools failed to teach them. The government wants to use a lottery so it can get extra money from poor, uneducated people while pretending to have a progressive tax system which doesn't hurt the poor.

that is false, plenty of people understand the math perfectly but play anyway. You don't understand the nature of three-quarters the people you meet (that's about the fraction of people who gamble at every place I've ever worked, and we're talking college educated people of median income of $85K currently)

Indeed. I've failed to see the "tax on the people who are bad at math" argument. Yes, the odds of winning are astronomically high. They are however, non-zero, and someone DOES eventually cash out on the jackpots. Deciding to take a gamble isn't stupid so long as you know and accept the odds.

If you go obsessive over it (ie, dumping loads of money into the lottery as a financial "plan"), then sure, but myself for example - my state has had the lottery for about 10 years now. In those 10 years, I've bought about 8 or so lottery tickets. So I'm spending less than a dollar per year on average. Still haven't won, and don't think I realistically ever will, but it's not too much of a financial burden to gamble away at a long shot (yes, a really, really LONG shot).

Basically, I go by the advice my dad taught me while playing cards - expect that you're going to lose every bet you ever make. If you're not ok with that outcome, then don't make the bet in the first place.

Basically, I go by the advice my dad taught me while playing cards - expect that you're going to lose every bet you ever make. If you're not ok with that outcome, then don't make the bet in the first place.

Sound advice. And the same goes for insurance, which is just a different form of gambling despite the name. Don't gamble with cash you cannot afford to lose, i.e. insure risks you cannot carry financially. But self-insure the rest; the same smug guys going on about lotteries being a tax on people bad at math are often happy to have insured *everything* down to their cell phones and computers. Just remember: insurance companies are just like casinos: they're not charities.

Why don't the governments stop pretending. The lottery is intended on a tax for those who can't do math. And most of those people can't do math because the government schools failed to teach them. The government wants to use a lottery so it can get extra money from poor, uneducated people while pretending to have a progressive tax system which doesn't hurt the poor.

I can't believe you're equating the lottery with a tax. Lotteries are entirely optional. It may be more appealing to those who don't see any other recourse for getting more money, but it's not required by law.

I used to code slot machines, hence staying anonymous. At some point, a different point for each bank of slots, the pay tables will reach over 100% payout if the jackpot is large enough. It was well known that by that point, professional gamblers and their buddies would squat on each machine tied to the progressive payout and play them until one of them hit the jackpot. The casinos didn't care, nor should they, because the overall pay table was still 95% or 90%. In other words they still made their money on the masses. But if you as an individual watch closely enough, in the short term you can make money.

Somewhat unrelated, there are also video poker machines that if played "perfectly" will earn you about $8 / hour statistically, although you may have to put in considerable hours before seeing the profit. Again it all depends on how the pay table is structured.

Somewhat unrelated, there are also video poker machines that if played "perfectly" will earn you about $8 / hour statistically, although you may have to put in considerable hours before seeing the profit. Again it all depends on how the pay table is structured.

Hm. $8/hour to play video games? Does sound better than flippin' burgers, but no real opportunity for advancement...

I really wouldn't be surprised. In fact, I expect that the gambling industry cackles to their cold black heart's delight when these sort of stories get spread around. "You can make money by gambling" has to be one hell of an advertisement for them. Not that I'm accusing you of astroturfing. The gambling industry has long realized that they can affect the through the market.

That's why I treat gambling as entertainment and not as a money-making opportunity. $10 can buy you an hour or two's entertainment at a slot machine. (Some of them are all but arcade games.) I'm well aware that, at the end of the time, I'll more than likely be left without any cash, but it's the experience rather than the money that I'm after. Any money I win is just a bonus. (Then again, I also rarely gamble so it isn't like I'm spending a ton of money on a "gambling experience.")

I'm all for freedom to live your life the way you want and all that. But for the *state* to openly exploit its citizens with these parasitic lotteries makes my stomach turn. Rather than raise taxes, let's exploit out poorest and dumbest citizens! Yea!!!

Thats what we did in Florida. All lottery funds are used for education.

Unfortunately they've cut *all* other funding sources for education... so sure since the late 80s the lottery has given over 10 billion to education... and the first few years were gravy... but now the lottery is the *only* funding source for education...

So would we, the citizens of Massachusetts. Instead, the lottery commission has created thousands of high-paying, do-little jobs for government insiders. Payouts to the cities and towns aren't nearly what they should be. In other words, the state is the crook.

I'm all for freedom to live your life the way you want and all that. But for the *state* to openly exploit its citizens with these parasitic lotteries makes my stomach turn.

I'm all for the state allowing its citizens (and those from neighboring states) to voluntarily donate their money to pay for state services on the off-chance that those citizens will get a good payout, rather than have the state take money by force from everyone to pay for things that not everyone wants or uses.

It is hard to call someone doing something totally voluntarily as "being exploited", since all they would need to do to stop being exploited is... not do it.

These are all Chinese companies pulling the reverse merger trick, using a shell company to become them, so they avoid having to file with the SEC and become publicly traded companies with essentially, no oversight.

"A lottery agent who sells tickets to the group said Tong’s Fortunelot invested $200,000 at his store in May and won $280,000."

The $200,000 investment would presumably be after tax money. The 280,000 dollars in winnings would be taxable. At the Bush Tax Cut marginal rate of 35% that would leave 182,000, for a net loss of $18,000. Presumably the bettors must also be finding a way to game the tax system as well.

Loses and expenses can be taken against winnings. I'm not sure if that includes the cost of the winning ticket, but let's assume not.

If the average winning ticket is worth $1000 (a number I just pulled out of my butt after having RTFA in the paper yesterday; I don't recall if it gives an actual average pay-out per ticket), $280,000 means 280 winning tickets. Which also means 99,720 losing tickets.

A small detail from the fine article notes that all of these players buy the tickets on behalf of a corporation which they wholly own. Corporations pay taxes based on profits. Simply put, revenue minus expenses. They are likely writing off the cost of the tickets as expenses.

That would be $280,000 revenue - $200,000 expenses - $80,000x35%=$52,000 for three days of work.

If you hang around people with serious gambling addictions you would know that this isn't just some corporate tax dodge. If you have proper documentation about gambling wins and losses you, and individual, can deduct your gambling losses.

This means that if you drop $50,000 at the craps table one night you can indeed deduct that against your $100,000 winnings the next night. I do not believe gambling losses can offset any non-gambling income.

You can deduct your gambling wagers from your gambling winnings for tax purposes.
I'm not a tax person, and this is not tax advice, but I know some gamblers who've dealt with the tax implications winning.

While playing the lottery is for people bad at math, designing the lottery is for people good at math and if you are very good you let it be rigged in a non-obvious statistical sense. A very serious look needs to be had at those who designed this system.

Well the winners were able to win by bending a few rules. To win in this system, a large number of purchases have to be made. In the case of the couple, they purchased approximately 250,000 tickets. But to do so, some of the rules that were bent were the store were kept open outside normal hours for them specifically, a machine that was only to be run by a store employee was run by one of the couple, and tickets were purchased for the couple when they were not there. If these rules had not been bent, th

Do they get to keep it, or do they get it all taken back in Federal and state taxes? It has been pretty obvious that these games that accumulate value based on lack of previous winners will pay out larger amounts, but the taxes on the win and the chances of having to split the jackpot have to be taken into account when considering when to play. It is interesting that Mass came up with a way to increase the value of the lesser prizes, that seems a flawed design that would keep those prizes higher as long as

I found it interesting that the article states that there is "almost no chance of losing" if you buy enough tickets, but that's not a 100% guarantee. It will just be a matter of time before someone plays the odds and that unlikely event of losing money happens.

I found it interesting that the article states that there is "almost no chance of losing" if you buy enough tickets, but that's not a 100% guarantee. It will just be a matter of time before someone plays the odds and that unlikely event of losing money happens.

Yeah.. but then you employ my patented scheme.. the next time you bet *double* the amount.. so you make up for the losses! Play that way and you can't lose!!!!

It'd only be broken if the state lost money. Which it doesn't. Total payout is never more than the state collects. The only thing being trickled down is what it would dole out in winnings. As the article says, these people spending hundreds of thousands of dollars lost their shirts when one of the bulk sales happened to hit the jackpot and it wasn't them, starving the lower winnings of their cash.

Every jackpotting lottery reaches a point at which there is positive expectation in playing. Of couse in practice they it might never happen, but if the jackpot doesn't go off for long the payout starts to beat the odds.

The strange "pay the jackpot out on non-jackpot prizes instead of increasing forever" rule here makes it happen more often.

Though note this isn't a lock, they can lose money if too many people end up with winning tickets. Either because someone else actually hit the jackpot or because lots o

This is only slightly different than playing PowerBall when the grand prize pool goes over $195,249,054. When the grand prize pool goes over that amount (based on the odds), your expected value for a $1 ticket goes over $1. Now, granted, even if you invested $100,000, you wouldn't be guaranteed of winning the grand prize and that's the difference with this game; the odds improve if the grand prize isn't won.

So essentially, I'm going to look for situations where my expected value is higher than the price of

they made an economical decision how to invest the 1.6M - and it is a very lucrative investion.

It is not without risk. If someone wins the jackpot for that drawing, they win exactly zero dollars. According to the article, that has happened once before. Additionally, the article mentions that if you buy $100,000 in tickets you have a 72% chance of winning more than $100,000. It is not guaranteed.